THE Reserve Bank of Australia (RBA) has lowered its forecasts for inflation and economic growth, but sees those forecasts as resting on some key assumptions about wages and productivity.
In its quarterly statement on monetary policy today, the RBA confirmed that, although Europe's sovereign debt crisis remains the biggest risk to world economy, its interest rate cut on Tuesday was a response to slower economic activity in Australia.
It had earlier flagged the possibility of lower rates, given a benign inflation outlook, if the economy needed a boost. In the statement, the RBA said that data over the recent couple of months had "suggested that it was appropriate to take a further step in that direction".
It also noted the widening of the gap between bank funding costs and the cash rate, about 20 basis points (0.2 percentage points) since the middle of last year.
That was a clear indication that the bigger-than-normal cut in the cash rate - half a percentage point - was driven by the efforts by the banks to sustain their interest margins than any sense of panic at the RBA over the economy.